This article appeared in the June 2011 ASX Investor Update
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Roadshow explains how SMSFs can use listed products to build retirement savings.

By Ian Irvine and Graham O’Brien, ASX

More self managed super funds (SMSFs) are changing their investment composition, the 2010 ASX Share Ownership Study shows. The biannual investor survey found the proportion of SMSFs investing in unlisted managed funds declined from 46 per cent in 2006, to 38 per cent in 2008 and to 16 per cent in 2010.

The trend of SMSFs using more listed products over unlisted products is one reason ASX conducted a major SMSF roadshow Taking Control of Your Retirement Savings in May and June. You can still register for the June 16 webinar on this roadshow. The roadshow considered issues around transition to retirement, SMSF investment strategies, and estate planning.

ASX Self-Managed Super Funds provide general information about setting up an SMSF.

Five growth stages

There was much interest from SMSF trustees at the roadshow about using ASX Listed products in the five main stages of retirement savings, summarised in this table:

High Growth

Growth

Balanced

Moderate

Conservative

Years to retirement

Significant years to retirement

5-10 years to retirement

Within five years to retirement

Retirement in near future

In retirement

Risk appetite

Higher

Tapering

Needs certainty, lower risk

Moderate/very low risk appetite

Moderate/very low risk appetite/high certainty needed

Loss tolerance

One year of negative returns in every 3-4

One year of negative returns in every 4-5

One year of negative returns in every 5-6

One year of negative returns in every 6-7

One year of negative returns in every 8-9

Use of Gearing (borrowing strategies)

Suitable

Maybe

Unlikely

Not suited

Not suited

Source: ASX

Set the right asset allocations for you

The stage of your retirement savings affects the weighting of assets in the SMSF. For example, an SMSF in the high-growth stage might hold a considerably higher allocation of Australian and international shares than an SMSF in the conservative stage, because a trustee of an SMSF in the high-growth stage can take risks in that they have more years to retirement.

Consider these asset allocations in the charts below for SMSF investments across the five stages.

(Editor's note: Do not read these allocations as a recommended investment strategy, or financial advice. Every investor is different. Do further research of your own or talk to your financial adviser about an SMSF asset allocation that best suits your investment goals and risk profile.)

This chart shows asset allocations in a high-growth portfolio [all charts are from ASX].

This chart shows asset allocations in a growth portfolio.

This chart shows asset allocations in a balanced portfolio.

This chart shows asset allocations in a moderate portfolio.

This chart shows asset allocations in a conservative portfolio.

This final chart shows how portfolio allocations can evolve as an SMSF grows. Note how conservative investors in retirement (conservative stage) have a much lower asset allocation in Australian and international shares, compared to other asset classes, to reduce risk.

Having decided on asset allocations, the next step is rebalancing portfolios, at least once a year, to ensure allocations do not become too skewed to a particular asset. These allocations will change during the investment lifecycle as the portfolio moves through the stages, and in response to market circumstances. For example, a sustained rally in shares could see the allocation to shares in a moderate portfolio exceed its target allocation, thus increasing the portfolio's risk.

ASX Listed products are an easy way for SMSFs to diversify investments and rebalance asset weightings. Many SMSF trustees use ASX Listed ETFs as a simple, low-cost tool to rebalance asset weighting each quarter.

For example, an SMSF might reduce exposure to Australian shares if the allocation has exceeded its target weighting, simply by selling part of the ETF over the S&P/ASX 200 index. Similarly, they could buy or sell ASX-listed interest rate securities to maintain the weighting of fixed-income investments in their portfolio.

Other super investment considerations

ASX Listed products also help trustees with other important SMSF considerations, such as managing currency risk, gaining exposure to different asset classes, gearing, and asset protection.

Currency is an important consideration for SMSFs with investments in:

ETFs and exchange traded commodities (ETCs) that are not hedged for currency movements.

Australian companies with foreign earnings, dividends calculated in foreign currency, or which export from Australia.

International shares via ASX Listed exchange traded international securities that give investors exposure to 35 of the biggest companies traded on the New York Stock Exchange.

Gearing is becoming a more popular strategy within SMSFs that want to increase their exposure to shares through borrowing. ASX Listed self-funding instalments, a type of limited-recourse loan, are one of few investment products SMSFs are allowed to use for gearing. Self-funding instalments are a variation of the ordinary instalments structure. Dividends are retained by the instalment issuer to reduce the loan balance over time. Investors are still entitled to all franking credits, which may reduce their tax liability - an important consideration for SMSF trustees.

Exposure to different asset classes is another key consideration for SMSFs. SMSFs that want exposure to gold, without the currency risk, could consider BetaShares' new hedged gold ETF.

Finally, constructing and maintaining a strong SMSF should include some consideration of portfolio protection using ASX-listed Options, MINI Warrants, or Contracts For Difference (CFDs). Each product can act as a form of insurance to reduce risk of falls in the value of the portfolio. This table summarises the main differences in how ASX Listed CFDs, Options and MINIs can protect SMSFs.

This table shows the full suite of ASX Listed products suitable for SMSFs.

ASX Product

Asset Class

Description

Shares

Domestic
Equity

Description

Interest Rate Securities

Cash/Fixed Interest

Interest rate investments can provide investors with a regular income stream, diversification and portfolio stabilisation.

ETFs & ETCs

Domestic
Equity
International
Equity
Property
Commodity

ETFs and ETCs provide investors with the ability to establish a diversified portfolio easily and cost effectively through a single security

Listed managed funds hold and manage a portfolio of assets on behalf of their investors and can include a variety of assets.

REITS

Property

REITs allow investors to purchase an interest in a diversified and professionally managed portfolio of real estate in the same way as you would purchase shares in a company or a unit in a managed fund. The real estate portfolio can include commercial, industrial, retail or a mix of real estate assets.

Listed managed funds hold and manage a portfolio of assets on behalf of their investors and can include a variety of assets.

* ASX products denoted with an asterisk may carry additional risks and require further advice as to their use within an SMSF.

Talk to your financial adviser before using SMSF investment strategies discussed in this article. It is a requirement for SMSF trustees to have a clearly documented investment strategy and review it regularly.

About the authors

Ian Irvine is Head of Customer and Business Development, ASX.

Graham O'Brien is a business development manager, ASX.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.